What will happen when Government tell people in India to forget about buying Gold?

India’s demand for gold during the second quarter in 2013 topped all other countries, according to the latest World Gold Council data. As noted byWGC, demand for gold in India rose to its “highest in the last 10 years,” with jewellery ornaments, bars and coins demand, capping 310 tons during the period. We can see that India is not only country in the East to attract with gold. We know that Chinese loves for physical gold has endured, as gold deliveries on the Shanghai Gold Exchange climbed to record levels and jewellry stores were flooded with buyers in Beijing, Shanghai and Guangzhou.

Now the World Gold Council (WGC) confirms that in the second quarter, 60 percent of jewellery demand and almost half of all bar and coin demand came from these two countries.

From the Old Indians buy Gold with Bold

While financially traded gold, i.e., ETFs, experienced redemptions, physical gold was in strong demand. Besides China and India, people in the U.S., Europe, Turkey and the Middle East purchased tons of gold jewellery, bars and coins.In India, the Gold trade holds steady in spite of the government imposing import tax hikes on gold in an attempt to reduce the country’s current account deficit. In fact, according to the WGC, gold jewellery, bar and coin demand in India alone was 70 percent stronger in the second quarter of 2013 compared to the same quarter last year. When the increased duties were implemented, it was skeptical that gold demand would be curtailed because of India’s relation to the precious metal.

For decades, Indian families have celebrated weddings, births, festivals and holidays centered on gold and these traditions are passed down from generation to generation. Take the wedding industry, for example, where about half of the gold that Indians buy each year is for a wedding. With an estimated 10 million weddings taking place every year in India, the country sees a lot of gold buying out of love. Often the government policies can be precursors to change. Good policies can drive economic growth and markets respond positively. Bad policies can have the opposite effect. At the same time Indians buy gold out of love for their family and close friends, they are also buying gold out of protection.

Take a look at the chart below, which shows gold’s return in Indian rupee compared with gold’s return in the U.S. dollar. In the U.S., where the dollar has strengthened, gold has increased only 12 percent on a cumulative basis over the past three years. But in a country with a significantly weakening currency, gold gained nearly 50 percent.

Even INR gets weak, Gold increases due to demand

With the government in India recently raising its import tax for gold to 10 percent, I firmly believe Indians will continue indulging in gold, even if they have to smuggle it in.